Would the surtax on high earners just reduce the number of high earners?
A reader in Kansas City writes:
If income tax rate increases plus surcharges combine to push the effective rate for “the rich” up past 40 percent, won't we likely see a dramatic DROP in the income of the top one percent? Presumably many of the business owners who now treat their corporate earnings as personal income through LLCs and S-Corps will choose to return to their pre-1983 pattern of paying corporate tax instead (at 35 percent).
Possible impacts: Voila, the rising income gap plummets. Personal tax receipts for health care reform fall short. Corporate tax receipts rise sharply—but presumably with significant pressure on corporations to adopt new strategies for tax avoidance.
I imagine all these things would happen to some extent; I don't think anybody has a good sense of how dramatic the impact would be. But with the 5.4% surtax proposed for those with an adjusted gross income above $1 million, and lots of fiscally troubled states raising taxes at the top end of the income scale, the Tax Foundation has estimated that 39 states would have top marginal tax rates above 50%. Oregon would be the champ, with a top marginal income tax rate of 57.54%. When tax rates get that high, the incentives to go through contortions to avoid them get pretty high, too. Moving business income from the personal tax form to a corporate one is a pretty simple step many high-income individuals can and will take to avoid the new top rates.
None of that means the surtax isn't worth doing. Just that there will be diminishing returns to raising tax rates.
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President Obama wants us to believe that increasing taxes on the rich allows him to give more to the poor, ala Robin Hood. However, there is no historical relationship between federal spending and federal taxing.
Yes, raising the tax rate on the wealthiest Americans may address a psychological need to punish the rich for being rich. But, if this tax increase succeeds in collecting more taxes from any group, rich or poor, it will hurt poor people. All taxes remove money from the economy, which slows or reverses economic growth. Even now, with so many unemployed, the poor remain slow to understand that their jobs depend on the financial health of the rich.
The economy runs on money. One of the government's most important jobs is to create money and to spend it. In 1971 we went off the gold standard specifically to give the government the unlimited ability to create and spend money. When the government fails to do that job, the economy falters. Every depression in U.S. history and every recession in the past 40 years followed periods of reduced federal deficit growth, and every recovery as been associated with increased federal deficits.
The media and the politicians suffer from federal debt paranoia, which is responsible for more misery in America than all the crime and illness combined. Federal debt paranoia keeps us from providing universal health care, fully funded Social Security and improved education, military, infrastructure, energy and policing.
I call it "paranoia," because, history indicates large federal deficits do not cause inflation, recession or any other negative economic effect. On the contrary, large and growing deficits stimulate the economy. We keep falling back into recessions because of federal debt paranoia.
Although President Obama wants to redistribute wealth, increasing any taxes will reduce overall economic growth, taking from the rich and from the poor.
Rodger Malcolm Mitchell
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